For the first time since October, the PBOC (People's Bank of China) has cut its key interest rates. The one-year loan prime rate (LPR) was lowered by 10 basis points from 3.1% to 3.0%. The five-year LPR was also reduced by the same margin, from 3.6% to 3.5%.

One-year reference lending rate. Sources: PBOC, Trading economics

The major state-owned banks followed suit, lowering their deposit rates by between 5 and 25 basis points, depending on maturity. This was a way of preserving their margins, which have been severely tested by the continued decline in credit demand.

Most loans in China are based on the one-year LPR, while the five-year rate influences mortgage pricing. Both rates are now at their lowest levels since the overhaul of China's LPR mechanism in 2019.

Beijing's caution

While these measures support consumption and credit, their limited scope shows that Beijing prefers a gradual approach as negotiations with Washington on trade issues are ongoing. However, this cautious approach will make the 5% growth target difficult to achieve.

To sum up the situation, the pause with the US means that China is under less pressure to revive its economy, but at the same time this relatively weak support is preventing a real recovery in growth.

Statistics published on Monday show that consumption and the real estate market are struggling to really rebound.

Sources: CEIC, NBS, ING

The Chinese authorities are also careful to preserve the already eroded profitability of the banking sector and not to recreate a bubble in the real estate sector. This is why rate cuts are cautious.

Mainland Chinese equities reacted little to the announcement of the rate cuts. The CSI 300 closed the session up just 0.54%.